Finance Exam 2

12. An unexpected decrease in market interest rates will cause: a. no change in bond prices as the change was unexpected. b. an increase in coupon rates on new bonds but no change in bond prices. c. both bond prices and current yields to decrease. d. bond prices to increase and the current yield to decrease. e. both bond prices and yields to maturity to increase

d. bond prices to increase and the current yield to decrease

Treasury bonds are: a. issued by any governmental agency in the U.S. b. issued only on the first day of each fiscal year by the U.S. Department of Treasury. c. bonds that offer the best tax benefits of any bonds currently available. d. generally issued as semiannual coupon bonds. e. totally risk free.

d. generally issued as semiannual coupon bond

Which bond would you generally expect to have the highest yield? a. Risk-free Treasury bond b. Nontaxable, highly liquid bond c. Long-term, high-quality, tax-free bond d. Short-term, inflation-adjusted bond e. Long-term, taxable junk bond

long term, taxable junk bond

The taxability risk premium compensates bondholders for which one of the following? a. Yield decreases in response to market changes b. Lack of coupon payments c. Possibility of default d. A bond's unfavorable tax status e. Decrease in a municipality's credit rating

a bonds unfavorable tax status

Which of the following statements is incorrect? a. Assuming a project has normal cash flows, the NPV will be positive if the IRR is less than the cost of capital. b. If the multiple IRR problem does not exist, any independent project acceptable by the NPV method will also be acceptable by the IRR method. c. If IRR= k (the cost of capital), then NPV = 0. d. NPV can be negative if the IRR is positive. e. The NPV method is not affected by the multiple IRR problem.

a. assuming a project has normal cash flows, the NPV will be positive if the IRR is less than the cost of capital

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected? a.Default risk b.Taxability c. Liquidity d. Inflation e. Interest rate risk

a. default risk

The written agreement between the corporation and its creditors is called the bond: a. indenture. b. debenture. c. security. d. face. e. structure.

a. indenture

The NPV method's assumption that cash inflows are reinvested at the cost of capital is more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This makes the NPV method preferable to the IRR method. a. True b. False

a. true

Which one of the following statements concerning interest rates is correct? a. The stated rate is the same as the effective annual rate. b. An effective annual rate is the rate that applies if interest were charged annually. c. The annual percentage rate increases as the number of compounding periods per year increases. d. Banks prefer more frequent compounding on their savings accounts. e. For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate.

b. an effective annual rate is the rate that applies if interest were charged annually.

Which one of the following is the price at which a dealer will sell a bond? A) Call price B) Asked price C) Bid price D) Bid-ask spread E) Par value

b. asked price

An example of a negative covenant that might be found in a bond indenture is a statement that the company: a.shall maintain a current ratio of 1.1 or higher. b. cannot lease any major assets without bondholder approval. c. must maintain the loan collateral in good working order. d. shall provide audited financial statements in a timely manner. e. shall maintain a cash surplus of $100,000 at all times.

b. cannot lease any major assets without bondholder approval.

The interest rate risk premium is the: a. additional compensation paid to investors to offset rising prices. b. compensation investors demand for accepting interest rate risk. c. difference between the yield to maturity and the current yield. d. difference between the market interest rate and the coupon rate. e. difference between the coupon rate and the current yield.

b. compensation investors demand for accepting interest rate risk.

Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today? A) Clean price B) Dirty price C) Asked price D) Quoted price E) Bid price

b. dirty price

The yields on a corporate bond differ from those on a comparable Treasury security primarily because of: a. interest rate risk and taxes. b. taxes and default risk. c. default and interest rate risks. d. liquidity and inflation rate risks. e. default, inflation, and interest rate risks.

b. taxes and default risk.

Which one of the following statements is false concerning the term structure of interest rates? a. Expectations of lower inflation rates in the future tend to lower the slope of the term structure of interest rates. b. The term structure of interest rates includes both an inflation premium and an interest rate risk premium. c. The term structure of interest rates and the time to maturity are always directly related. d. The real rate of return has minimal, if any, effect on the slope of the term structure of interest rates. e. The interest rate risk premium increases as the time to maturity increases.

c. The term structure of interest rates and the time to maturity are always directly related.

A bond that is payable to whomever has physical possession of the bond is said to be in: a. new-issue condition. b. registered form. c. bearer form. d. debenture status. e. collateral status.

c. bearer form

The security that represents the residual ownership of a firm and has no priority in bankruptcy is called: a convertible bond. b. senior debt. c. common stock. d. preferred stock. e. retained earnings.

c. common stock

A premium bond is a bond that: a. is callable within 12 months or less. b. has a face value in excess of $1,000. c. has a market price which exceeds the face value. d. is selling for less than par value. e. has a par value which exceeds the face value.

c. has a market price which exceeds the face value

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity? a. Default risk b. Taxability c. Liquidity d. Inflation e. Interest rate risk

c. liquidity

The pure time value of money is known as the: a. liquidity effect. b. Fisher effect. c. term structure of interest rates. d. inflation factor. e. interest rate factor.

c. term structure of interest rates

Which of the following statements is false? A) The bond certificate typically specifies that the coupons will be paid periodically until the maturity date of the bond. B) The bond certificate indicates the amounts and dates of all payments to be made. C) The only cash payments the investor will receive from a zero coupon bond are the interest payments that are paid up until the maturity date. D) Usually the face value of a bond is repaid at maturity.

c. the only cash payments the investor will receive from a zero coupon bond are the interest payments that are paid up until the maturity date.

Dividends are payments: I. of cash only. II. of either cash or stock. III. to bondholders. IV. to shareholders. a. I and III only b. I and IV only c. II and III only d. II and IV only e. I, III, and IV only

d. II and IV only

The net present value: a. increases as the required rate of return increases. b. is equal to the initial investment when the internal rate of return is equal to the required return. c. method of analysis cannot be applied to mutually exclusive projects. d. is inversely related to the discount rate. e. is unaffected by the timing of the related cash flows.

d. is inversely related to the discount rate

An annuity where the cash flows continue forever is called a(n): a. ordinary annuity. b. annuity due. c. absolute annuity. d. perpetuity. e. perpetuity due.

d. perpetuity

. Which one of the following statements is correct? a. The payback period is computed based on the present value of each of a project's cash flows. b. The payback rule states that you should accept a project if the payback period is less than one year. c. The payback rule works best when applied to mutually exclusive decisions. d. The payback rule is biased in favor of short-term investments. e. The payback period considers the timing and amount of all of a project's cash flows.

d. the payback rule is biased in favor of short term investments

Which one of the following methods has the greatest bias towards short-term projects? a. net present value b. internal rate of return c. average accounting return d. profitability index e. payback

e. payback

The payback period is the period of time it takes an investment to generate sufficient cash flows to: a. earn the required rate of return. b. produce the required net income. c. produce a yield equal to or greater than the market rate on similar investments. d. have a cash inflow, rather than an outflow, for the year. e. recover the investment's initial cost

e. recover the investments initial cost

A sinking fund is managed by a trustee for which one of the following purposes? a. Paying bond interest payments b. Early bond redemption c. Converting bonds into equity securities d. Paying preferred dividends e. Reducing bond coupon rates

early bond redemption

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond? a. Real rate risk b. Interest rate risk c. Default risk d. Liquidity risk e. Taxability risk

interest rate risk

Which one of the following statements concerning bond ratings is correct? a. Investment grade bonds are rated BB or higher by Standard & Poor's. b. Bond ratings assess both interest rate risk and default risk. c. Split-rated bonds are called crossover bonds. d. The highest rating issued by Moody's is AAA. e. A "fallen angel" is a term applied to all "junk" bonds.

split rated bonds are called crossover bonds